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Marc Lavoie’s Friendly Critique of MMT

In a recent working paper, Marc Lavoie provides a friendly critique of neo-chartalism (MMT). Hat tip to Cullen Roche for the link.

My own reaction to the paper, which may differ from how the experts will react, is that it is a promising development. First, Lavoie demonstrates a strong understanding of the approach, which is not surprising given he co-authored the seminal book on sectoral-balances analysis with Wynne Godley. His depiction of MMT will not prejudice the issue for readers of the paper. Second, Lavoie appears to be in close agreement with MMT on many substantive points and goes into some depth on areas of consistency between MMT and Post Keynesianism.

His central criticism focuses on the technical sense in which taxes and bonds can or cannot be said to “finance” deficits under current self-imposed arrangements. The argument centers on the MMT treatment of the consolidated government sector (the collapsing conceptually of the Fed and Treasury into one). If I am understanding correctly, then in relation to the U.S., Lavoie might be paraphrased as saying “the government could have complete sovereignty, but does not quite have it under current arrangements”, whereas leading MMTers might be paraphrased as saying “the government effectively has full sovereignty but in a roundabout way”.

Implicit, though, seems to be a shared understanding that full monetary sovereignty could be made unambiguous, transparent, and straightforward in operation through certain modifications of current arrangements. The difference in opinion is over whether this is strictly the case at the moment.

Overall, I think Lavoie’s contribution is an encouraging development. MMT appears to be moving to a stage among some Post Keynesians of broad acceptance with differences mainly in details, not fundamentals. Debating the finer points is all part of healthy intellectual activity in the development and strengthening of a theoretical approach.

The Impact of the Blogosphere

It’s interesting to see the blogosphere having some influence on the development of theory in recent years. On the upside, it is creating greater awareness of various approaches. It has no doubt been easier to notice MMT because of its internet presence. On the downside, the standard of behavior in debate in the blogosphere can undoubtedly be unfortunate at times. Both these aspects are touched on in Lavoie’s paper. For those non-academics among us, such as myself, who are involved in the dissemination of MMT in small ways, we may need to keep this in mind, or find ourselves being quoted in scholarly journals as horrendous examples of militant behavior by autodidacts! Or, more seriously, we might inadvertently become a hindrance to the academic MMTers.

Besides, from a strategic standpoint, antagonism will rarely be more convincing to a neutral reader than civility. Maybe the trick is always to remember that the target audience of the blog post or comment is not just the person being responded to, but others who read without comment trying to determine their own positions. It is something I will try to keep in mind in my own posting activity, anyway, after reading Lavoie’s paper.

Can’t make any promises, though – heteconomist is far too undisciplined for that. 🙂

10 thoughts on “Marc Lavoie’s Friendly Critique of MMT”

There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; that government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures. All these counter-intuitive claims are mostly based on a logic that relies on the consolidation of the financial activities of the government with the operations of the central bank, thus modifying standard terminology

This is what LaVoie concludes and from an economics profession fair enough but without all of these, a layperson autodidact would still be struggling to understand the essence of neochartalism/MMT.

Ultimately the constructive criticism is about “standard terminology” which is simply an English language problem & the level of abstraction used as the neochartalism/MMT starting point.

Without that though the denizens of the blogosphere and wider media that have an interest in monetary matters would still be in the dark.

I’m not sure I agree with Lavoie on his terminological and substantive criticisms in any case, but will be interested to see if the academic MMTers agree with his suggested modifications in terminology and abstractions. I do think overall, though, that Lavoie’s paper is a positive step, and contains a lot of excellent discussion. I enjoyed reading it.

I started to compose a reply to your comment and it morphed into something five times as long as the original post. I will put it up as a separate post.

Well Peterc, actually very little thoughts! Agree with most things in the paper. The Neo-chartalist overkill is counterproductive.

E.g., changing the meaning of “spending” to defend their claims. C’mon central bank lending is not “spending”.

I liked “adding water in the wine” and “if all goes well(!)”

Personally I think, Neo-chartalists’ mix-up of the balance of payments constraint is a bit amusing to me. But anyway topic of another day.

(I do not put Charles Goodhart in the list of Neo-chartalists, so here I mean those economists who called themselves “Modern Monetary Theorists”)

Its good someone like Marc Lavoie has written it – the usual argument “integrates horizontal and vertical” (whatever those terminologies mean) doesn’t apply to him because of his great book with Wynne Godley. Marc has himself been the leader of the endogenous money approach since the early 80s.

To me, things such “taxes don’t fund anything” sounds silly to the core. Its the power to fund through taxes, which gives the government the fiscal powers – such as, to run an unbalanced budget.

Also, an open line of credit to the government at the central bank is not allowed in any nation – read Rochon and Rossi’s articles on this. It is true that at turbulent times, governments can make a draft on the central bank but it doesn’t help describing the government as having an open line of credit.

More generally, MMT is a voice to increase the role of fiscal policy in running world economies but hardly the only one. To put that forward, the MMTers have taken an overkill approach which desperately attempts to make the current modus operandi of the Treasury and the central bank look like what they propose.

“Also, an open line of credit to the government at the central bank is not allowed in any nation”

But that doesn’t mean that it shouldn’t have one.

Again mixing the existing arrangements with what the economics of the system produces when those arrangements are removed doesn’t help.

An man strapped to a chair has no capability to move his arms and legs. But that doesn’t stop him having arms and legs, nor does it stop you working out what those arms and legs can do in the absence of the strapping.

And unless you study that you can’t put a coherent argument together to remove the strapping.

The economic theory is not the same as the economic policy deriving from that theory.

I myself have observed some of the things Lavoie mentions and I also have some questions, especially in what regards to horizontal money (bank created through loans, for instance).

But, as it appears is your case, PeterC, I found the question of militancy most salient.

As a Marxist (although I am not an academic, only an amateur), I feel that some of Lavoie’s observations/criticisms could easily be directed to Marxists.

Would it be excessive to attribute the militancy one observes in some MMTers and most Marxists (me included) to similar causes?

Speaking from my own experience, at one hand there is a sense of urgency in making one’s case and frustration that the case is not considered honestly or even seriously.

As you surely know, Marxism can be seen as a scientific theory of what makes the capitalist system tick and/or as a political praxis to accelerate its demise. Those who like me choose to see it not only as a scientific theory, but as a practice, tend to be militant.

Could something similar explain the militancy of some MMTers?

You find similar attitudes among right-wingers, by the way. And their objective, like Marxists’, is political. The difference is in the objectives themselves.

I think for heterodox economists dogged persistence in expressing truth as they see it is important, especially when dealing with the mainstream, which will often misrepresent, distort or simply conceal alternative positions. As much as possible, I think debate should be carried out politely, but there is no polite way, for instance, to label a dishonest statement a lie, and lying is often used in public and academic debate and needs to be called out when it occurs.

In the context of Lavoie’s paper, though, I think the issue is somewhat easier. Here, we are not dealing with the mainstream but with other heterodox economists. Unless one heterodox group is intentionally misrepresenting the position of another, I think debate can be kept civil. I guess part of the problem is that sometimes a mischaracterization is interpreted as intentional when it is not.